National Public Radio is reporting that the Dollar has fallen, and foreign banks are increasingly keeping Euros and, of all currencies, the Yen as their reserve denomination. The Dollar has fallen 12% from its recent peak, and appears likely to lose additional value.
In March 2008, before the financial crisis, the dollar was at historic lows against a basket of currencies. Then, when the financial storm struck, the dollar strengthened as investors rushed to the safety of U.S. Treasury securities.
Now that the worst of the crisis appears to have passed, the dollar is under pressure again. It’s down more than 12 percent from its recent peak. Fred Bergsten of the Peterson Institute for International Economics says sentiment about the dollar has now turned negative.
While this is alarming to many, to some it is no surprise. In fact, many economists predicted after the Bush Administration’s Troubled Asset Relief Program (TARP) and the Obama Administration’s Stimulus bill, the hundreds of billions of extra Dollars being dumped onto and the mounting deficits of the United States Government would depress the Dollar significantly when compared to other currencies.
The result: Americans are poorer now than they have been, compared to the rest of the world. Since the Dollar has lost value, it takes ever more Dollars to buy products from other nations. Fears of more and greater deficits in the coming years create even greater distrust of the Dollar, resulting in more hedging with other currencies. It is a wicked spiral that can only be broken by more responsible actions by our government.
The United States must come back to reality: We can no longer spend like bachelors on a weekend in Las Vegas, signing for ever greater lines of credit to cover our losses. The International Casino is rapidly approaching the point where it will call in our debts, while we have blown our chips at the craps table.
Americans must understand that the current level of spending by our Federal Government cannot be sustained. Already, foreign countries are refusing to purchase our debt, meaning that we must simply print more Dollar bills to cover our deficits. This increase in the number of Dollars available is precisely what is causing the deflation of the currency: Because there are so many more available, the Dollars themselves are worth less.
Just like Casino chips, the Dollar or any other currency has value simply because we believe it does. Even when backed up by gold or other precious metals, currencies maintain only that value that the precious metal maintains. If tomorrow everyone decided that gold was worthless, it would be so, and the millions of tons of refined gold would not buy a shanty on the edge of Mogadishu. If a Casino declared bankruptcy, its chips would likewise hold no value. The same goes for the Dollar: If tomorrow every other nation decided that the Dollar held no value for them, we would be unable to conduct international trade to buy oil, microwaves and iPods.
The result of this devaluation? Already there are reports (although denied) that OPEC is considering ending or limiting its practice of trading oil in Dollars, as Dollars buy less and less oil over time compared to the more stable Euro. The massive increase in the number of Dollars is leading, inexorably, to inflation. Indeed part of the reason for expensive crude oil is the steady drop in the value of the Dollar over the last decade, worsened lately by its precipitous drop compared to other currencies.
Both Parties and both Presidents Bush and Obama can lay claim to some of the justifiable fear over the Dollar. The wild, excessive spending on transfer payment programs such as Medicare Part-B, Welfare and Social Security (where more than half of our Federal Budget is spent) as well as corporate welfare programs like TARP and Cash for Clunkers, combined with the seeming lack of concern over the ever-increasing American national debt gives other nations strong reason to doubt our fiscal and economic capability to honor our currency. As we propose to spend hundreds of billions of additional Dollars on new programs, the queasiness felt by foreign ministers and private bankers transforms into outright nausea.
Similar events to our current situation happened in Weimar Republic in Germany prior to the National Socialists (aka “NAZIs”) being elected into power. It happened again in Argentina in the 1950s. Will we choose to end our excessive borrowing or follow the paths of these states into ecnomic and social ruin, civil unrest and, quite possibly, into war?
If we cannot stop the spending, curb our deficits and reduce our debt, at least as it relates to GDP and overall tax receipts, we will find outselves losing everything at this international game of Roullette. At one time, in Las Vegas when a gambler could not pay his debts, they broke his knees. America needs to quit while it is behind, lest we find ourselves on crutches.
Originally posted at The Minority Report.